Answers

Professional Level – Options Module, Paper P6 (SGP)Advanced Taxation (Singapore) December 2015 Answers

Note: ACCA does not require candidates to quote section numbers or other statutory or case references as part of their answers.Where such references are shown below, they are given for information purposes only.

1 Company A

Tax AdviserFirm’s address

The Board of DirectorsCompany ACompany address

10 December 2015

Dear Sirs

With reference to your request for advice following the review of the tax affairs of Company A and its subsidiaries, we are pleasedto set out our comments below:

(i) Company A – Deductibility of expenses

Company A is an investment holding company, as its principal activity is that of investment holding. It derives passive incomefrom investments such as dividends, interest or rentals and does not carry on a trade or business.

An investment holding company can only deduct expenses to the extent that they are attributable to its investment incomechargeable to tax in Singapore. Capital expenses and expenses attributable to non-income producing investments are notallowable. Deductible expenses include direct expenses, statutory expenses and indirect expenses. However, the totaldeduction for indirect expenses is capped at 5% of the gross investment income. In addition, the amount deductible forcommon expenses (which include both statutory expenses and the allowable indirect expenses) is further limited to theamount attributable to the proportion of the investment income chargeable to tax as follows:

Investment income chargeable to tax x statutory and indirect expenses–––––––––––––––––––––––––––––––

Total investment income

Any excess of expenses over the income received from one source of investment income cannot be claimed against the surplusarising from another source of investment income, e.g. any excess of expenses attributable to rental income cannot bededucted against dividend or interest income. In addition, any unutilised losses cannot be carried forward and deductedagainst the income of a subsequent year of assessment. Also, since there is no trade carried on, an investment holdingcompany cannot claim capital allowances.

Company A’s chargeable income for the year of assessment (YA) 2015 will thus be determined as follows:

$ $One-tier dividend income – tax exempt 0Interest income 40,000

–––––––Total investment income 40,000Deductible expenses:Direct interest expenseApplicable share (4,000,000/100,000,000 x 200,000) (8,000)Other allowable (common) expensesStatutory expenses 25,000Indirect expenses (capped) (5% of 1,000,000) 50,000

–––––––75,000–––––––

Applicable share (40,000/1,000,000 x 75,000) (3,000)–––––––

Chargeable income before partial exemption 29,000Less partial exemption:(10,000 x 75% + 19,000 x 50%) (17,000)

–––––––Chargeable income 12,000

–––––––

The above calculation illustrates how the restrictions result in virtually all of Company A’s expenses being non-deductible fortax purposes. To overcome these restrictions Company A should consider the following actions:

Interest expenseThe loan is partly financing the activities of Company B and Company C. Therefore the debt, or at least so much of it as canbe attributable to the operating activities of the two subsidiaries, should have been taken up by the most profitable operatingentity, i.e. Company B. To achieve this, Company B could take out a bank loan and extend a similar loan to Company A,which will then enable Company A to repay some of its existing debt obligations and thereby reduce Company A’s interestexpense and consequently the effect of the restrictions.

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It will be necessary for Company B to charge some interest on the loan made to Company A in order for it to claim a fulldeduction for its own interest expense (assuming Company B has no other non-income producing assets). However, as theloan is a domestic loan, there is no strict requirement for a market interest rate to apply to the loan.

Directors’ employmentConsideration should also be given to the feasibility of the directors being employed primarily, if not exclusively, by Company B. Company A should carry out a study to determine the extent to which the activities of the directors, particularlythe two executive directors, can be considered as attributable to the operating activities of the two subsidiaries. To the extentthat the director’s remuneration is borne elsewhere, the effect of the 5% cap on indirect expenses in Company A will bereduced.

Further, as an investment holding company which does not carry on a business, Company A was unable to claim aproductivity and credit (PIC) deduction, PIC cash payout or PIC bonus for the training expenditure incurred in 2014. However,if the directors were to be employed by Company B (rather than Company A), then it would be possible to claim either thePIC enhanced deduction or PIC cash payout (no PIC bonus after YA 2015) for any qualifying training expenses incurred infuture years.

(ii) Company A – Errors in tax compliance

CalvinCalvin is subject to Singapore tax on his director’s fees. As a non-executive director, Calvin who is tax resident in Malaysiawould need to be physically present in Singapore for at least 183 days in any calendar year in order to be treated as a taxresident of Singapore and so not be subject to withholding tax. Since Calvin was only physically present in Singapore to attendthe board meetings for four days in 2014, he will not be treated as a tax resident of Singapore in that year. Accordingly,withholding tax at the rate of 20% ought to have been deducted from the director’s fee of $100,000 paid to him. Thewithholding tax of $20,000 was due by the 15th of the second month following the date of payment, as determined basedon the date of the meeting approving the director’s fee.

Failure to withhold and pay over this tax exposes Company A to a late payment penalty of up to 20% of the withholding taxpayable, based on a 5% immediate penalty for missing the deadline and an additional 1% for each complete month of delaythereafter for a maximum of 15 months.

Aaron and BettyThe executive directors Aaron and Betty ought to have declared the transport allowances paid to them in their individual taxreturns. Such allowances are clearly taxable benefits arising from their employment with Company A even though they wereonly meant to compensate them for the private car expenses incurred for business purposes.

Failure to declare such benefits would constitute a tax offence for which the individual directors will be penalised. Assumingthis is not a tax evasion case (i.e. there was not a deliberate intention to wilfully evade taxes), the two directors are likely tobe treated as negligent and accordingly would be liable to pay a penalty based on up to 200% of the tax undercharged andin addition, a fine of up to $5,000 and/or a jail term of up to three years could be imposed. Similar penalties could also beimposed on Company A for the omission of these taxable employment benefits from the respective director’s Form IR8A.

Under the law, the Inland Revenue Authority of Singapore (IRAS) is empowered to raise additional assessments for as longas the relevant YAs are not yet statute-barred. The statutory time limit for the IRAS to raise additional assessments is currentlyfour years. Therefore, as at 1 January 2015, the IRAS is no longer able to raise any additional assessment for YA 2010 (i.e. the financial year ended 31 December 2009) or previous years. However, it should be noted that this statutory time limitis not applicable to instances where fraud or wilful default is involved.

Given the potential penalties for Company A for both the withholding tax and the income tax applicable to the transportallowances, it should make a voluntary disclosure of the errors. If the disclosure is accepted as voluntary, no penalties willbe imposed for disclosures made within a grace period of one year from the date of the statutory filing date. Beyond the graceperiod, the potential penalty can be capped at 5% for the withholding tax and 5% per annum for each back year.

(iii) Company B – Tax incentives

Pioneer incentiveFor Company B to apply for the pioneer incentive, it must first ascertain whether it is operating in a pioneer industry or theproposed product will be declared as a pioneer product. For this to be the case, the Minister must consider that:

– it is in the public interest;– the current industry is not of a sufficient scale adequate to Singapore’s economic needs; and– there are favourable prospects for the development of the industry.

Assuming that the development does qualify, then the profits derived from it will be exempt from tax during the tax relief periodit is granted. The actual duration of the tax relief period will depend on the nature and extent of the investments involved butwill be for a period of at least five and up to 15 years from the production day. The production day signifies the start of thetax relief period and is normally when marketable quantities of the product commence to be produced; however, this datecan be amended to commence either earlier or later on application to the Minister.

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Investment allowanceThe specialised equipment for use in the manufacture of the new drug will constitute fixed capital expenditure (FCE).Therefore, Company B may apply for an investment allowance (IA) of up to 100% of the FCE incurred during a qualifyingperiod of up to five years from the investment day, i.e. the day from which the company first qualifies for the IA. The IA isgiven in addition to the capital allowances normally available and has the added advantage that unused IAs can be carriedforward to set off against future YAs chargeable income without the requirement to satisfy the substantial shareholdings test.

The two incentives are alternatives. Where a company qualifies for both incentives, then the pioneer incentive is usuallypreferable because it gives full tax exemption for the profits earned in the tax relief period, which can exceed the initial FCEincurred. However, which incentive is better in any particular case will depend on the forecast amounts of annual losses andprofits, assumed corporate tax rates, and the exact terms of the incentives for which the company actually qualifies. AsCompany B expects the development to incur losses in the initial two years, the length of the relief period and the balance ofthe expected losses/profits over this relief period will be critical factors in the choice of incentive.

(iv) Company C – Goods and service tax (GST) obligations

Under the GST Act, every person who has an annual turnover of taxable supplies (i.e. standard and/or zero rated supplies)of goods and services exceeding or expected to exceed $1 million in value is required to register for GST within 30 days fromthe date of their liability to register. In determining whether this threshold is met, two bases can be used:

Retrospective basisUnder the retrospective basis, registration is compulsory if at the end of any quarter, the total value of all the taxable suppliesmade in Singapore in that quarter plus the previous three quarters has exceeded $1 million.

Prospective basisUnder the prospective basis, registration is compulsory if at any time, there are reasonable grounds to believe that the totalvalue of the taxable supplies in the next 12 months will exceed $1 million.

In Company C’s case, assuming the contract value was already known when it first secured the contract on 30 December2014, then the company must register within 30 days from 30 December 2014, i.e. by 29 January 2015.

However, the consultancy services to be carried out for the Indonesian company will constitute an international service, andas such will be zero rated for GST purposes. Therefore, we would advise that unless Company C expects to derive anystandard rated GST supplies in the six-month period, it should write to the Comptroller of GST to seek exemption from GSTregistration. If granted the exemption, Company C will avoid any GST compliance costs and, moreover, in this case thecompany will not lose in terms of any GST input claim since its expenses comprise mainly salaries, which are out-of-scopefor GST and rental expenses, on which no input GST has been suffered because they are paid to a non-GST registeredlandlord.

We hope the above advice is helpful to you.

Should there be any questions or further advice you require, please contact me.

Yours sincerely

Tax Adviser

2 Maxim Elite Pte Ltd (MEPL)

(a) Professional services income from Company X

The provision of professional advice regarding the setting up of a legal presence in Singapore does not fall within the definitionof a prescribed financial service [Fourth Schedule of the GST Act]. As such for goods and services tax (GST) purposes, thesupply to Company X is not exempt but qualifies for zero rating as the service is provided under a contract with a person whobelongs outside Singapore and will directly benefit this overseas person [s.21(3)(j)].

Therefore, although no GST output tax needs to be collected, by treating the supply as exempt when it should have been zerorated, any input tax attributable to the supply of these services would not be claimable (whereas such a claim would be valid).This error will not incur any potential tax penalties, but it will have resulted in MEPL not fully claiming the input tax it wasotherwise entitled to.

(b) Transfer of fixed asset (laptop)

GST is a transaction tax and as such, it applies not just to the sale of goods and services (revenue transactions), but also tothe sale of capital assets. Since it is GST registered, MEPL should have accounted for deemed output GST on the transfer onthe laptop’s open market value, at the prevailing rate of 7%.

The accountant is wrong in claiming that because the value of the asset transferred is negligible, the GST implications canbe ignored. Reasonable efforts must be made to ascertain an approximate market value for the laptop and to account for theoutput GST on this value.

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(c) Acquisition of shares v acquisition of assets

GST implicationsThere is no GST on the transfer of an equity interest. Therefore, a purchase of the shares in Cambridge Financial Services PteLtd (CFSPL) by MEPL will be an exempt supply for GST purposes. Correspondingly, any input tax incurred on expensesrelating to the purchase of the shares will not be claimable.

If, however, CFSPL sells its assets to MEPL, then it would need to account for GST output tax at 7% on the market value ofthe assets transferred, unless the transfer qualifies as a transfer of a going concern.

A transfer of a going concern occurs where a business (or a part of a business which is capable of separate independentoperation) as a going concern is transferred between two GST taxable persons. Such a transfer is treated as neither a supplyof goods nor a supply of services for GST purposes, i.e. the transfer is an out-of-scope supply, and GST is not chargeable onsuch a transaction. This treatment applies only if both the transferor and the transferee are GST registered persons and theassets transferred are to be used by the transferee in an existing or new business of the same kind as that previously carriedon by the transferor.

As MEPL is a GST registered trader, the major part of whose services are provided to customers in Singapore, it is likely tobe paying GST to the Comptroller in every return period. Therefore, any GST which it may incur on a transfer of assets fromCFSPL will be claimable in full as an input GST credit, probably in the same period in which the GST is incurred. Thus MEPLis likely to be less concerned as to whether the transfer of assets from CFSPL is or is not treated as a transfer of a goingconcern, as the only net effect would be a possible minor cashflow disadvantage.

Stamp duty implicationsIf MEPL purchases the shares in CFSPL, stamp duty will be payable by MEPL based on the higher of the consideration paidor the market value of the shares at the rate of 0·2%.

If MEPL acquires the assets of CFSPL, then as purchaser it will pay stamp duty on any real property assets acquired (i.e. thecommercial unit), based on the higher of the consideration paid and the market value, at rates ranging from 1% to 3%.However, seller’s stamp duty only applies in the case of industrial and residential properties, so will not be applicable in thecase of the sale of assets by CFSPL.

Income tax implicationsFor the seller (CFSPL/its shareholders), there is potentially tax payable on both a sale of its business assets and a sale of itsshares if the transaction is treated as trading and a profit is realised from the disposal. However, the risk is low on both counts,as the reason for the sale is likely to have been CFSPL’s unfavourable financial circumstances rather than from any intentionto realise a profit from the sale.

For the buyer (MEPL), the consideration paid for the acquisition (shares or assets) will normally be treated as capitalexpenditure and therefore, ordinarily not a deductible expense. However, capital allowances may be claimed on any assetsqualifying as plant and machinery, including, in the case of the prescribed automation equipment, enhanced capitalallowances under the productivity and innovation credit scheme.

In addition, if it acquires the shares of CFSPL, MEPL may potentially be able to claim a merger and acquisition (M&A)allowance. Under this scheme, a company can claim an allowance of 5% of the cash consideration paid to acquire theordinary shares in a target company, directly or through a wholly owned acquiring subsidiary. The allowance is capped at $5 million for acquisitions made in each year of assessment and is deductible on a straight-line basis over a period of five years.

The qualifying conditions for the acquiring company under the M&A scheme are that:

– it and its ultimate holding company (if any) must be incorporated and tax resident in Singapore;– it must carry on a trade or business on the acquisition date;– it must have at least three local employees (excluding company directors) throughout the period of 12 months preceding

the acquisition date; and– it must not have been connected to the target company for at least two years prior to the acquisition date.

Prima facie MEPL would appear to satisfy these conditions. Also, as it intends to acquire all of the shares in CFSPL, theacquisition will be a qualifying acquisition, as MEPL does not currently own any shares in CFSPL and the acquisition willresult in it owning more than 50% of the ordinary shares in the target company (CFSPL).

Additionally, in the case of an acquisition of shares in CFSPL, MEPL is also eligible to claim a double tax deduction for anytransaction costs incurred, net of any grants or subsidies, subject to an expenditure cap of $100,000 per year of assessment.

A further advantage of qualifying for the M&A scheme is that MEPL will be eligible for relief from the stamp duty otherwisepayable on the share transfer, subject to a cap of $200,000.

Under both methods of purchase (shares or assets), the losses incurred by CFSPL prior to the acquisition by MEPL will belost unless in the case of an acquisition for shares, a waiver of the shareholder continuity test is granted. If such a waiver isobtained, then the losses may be carried forward but can only be deducted from the future profits derived from the same tradeor business in respect of which they arose, i.e. that part of the business which is ex-CFSPL.

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3 Cheryl Wee and Louis Styles

(a) Stamp duty on the purchase of the terrace house

The terrace house is residential property, therefore the stamp duty payable on its purchase by the buyer(s) is:

(1) Basic buyer’s stamp duty (BSD) of $144,600 (3% of $5 million less $5,400).

The rate of duty is determined solely by the value of the property, regardless of the residential status of the buyer.

(2) Additional buyer’s stamp duty (ABSD) of $750,000 (15% of $5,000,000).

Louis is a foreigner so the ABSD applicable to him is 15%. Cheryl is a Singapore citizen who already owns oneresidential property, hence this new purchase will be treated as her second purchase and thus attract a potential ABSDrate of 7% if the purchase is made entirely in her own name. However, in the case of joint ownership, the ABSD iscomputed based on the higher of the two rates, i.e 15%.

Therefore Louis is incorrect in believing that a joint purchase will result in a stamp duty saving compared to a purchase madesolely in his own name.

(b) Stamp duty on the sale of residential and commercial properties

Seller’s stamp duty (SSD) will be payable by Cheryl at the rate of 4% on the higher of the sale consideration and the marketvalue of the residential property at Tampines, if the property is sold before 16 October 2015, i.e. more than three but lessthan four years after its purchase. However, no stamp duty will be payable if Cheryl sells the residential property after thisdate, i.e. more than four years from the date of purchase.

There is no SSD on the disposal of commercial properties.

(c) Ways to minimise stamp duty in (a) and (b)

– Cheryl should purchase the terrace house in her sole name as the applicable ABSD would then be based on 7%, ratherthan the higher of the applicable rates as under joint ownership.

– If time permits, Louis should try to upgrade his status from that of a foreigner to either a Singapore permanent residentor even a Singapore citizen, as this will result in a lower ABSD rate.

– Cheryl should not sell the residential property until after 16 October 2015, i.e. after she has held the property for morethan four years from the date of purchase.

(d) Taxation of rental income from the letting of commercial property

Rental income derived from the letting of immovable property is sourced in Singapore if the property is situated in Singapore,regardless of where the tenancy agreement is signed or where the payment is made. Such income is taxable under s.10(1)(f)of the Act unless the rental of properties is the main business activity of the taxpayer.

Rental income is taxed on an accrual basis and it accrues on the date on which it becomes due, regardless of when it isactually paid and is assessed on a preceding calendar year basis.

Rental income is taxed on a net basis, i.e. gross rental income (including charges on the property, furniture and fittings andservice charges) less tax-deductible expenses.

The following expenses are deductible for income tax purposes:

– bank interest on a mortgage loan to purchase the property;– property tax;– fire insurance on the property;– repairs and maintenance, including maintenance charges paid to management corporations;– commission paid to secure subsequent tenants; and– the costs of renewing a lease or getting a new tenant (except for the first tenant).

The following are NOT deductible for income tax purposes:

– mortgage loan principal repayments;– agent’s commission, advertising and legal costs to secure the first tenant;– depreciation of furniture and fixtures; and– the costs of renovation, additions and alterations to the property.

When assessing taxpayers deriving rental income under s.10(1)(f), the Inland Revenue Authority of Singapore (IRAS) isprepared to grant the following concessions:

(1) Under the continuing source concession, taxpayers are able to claim expenses which are incurred during a vacant periodbetween two periods of tenancy. The concession does not apply if a subsequent tenant is not found and the property issold after a period of vacancy. It also does not apply in the case of a claim for property tax expense relating to a periodof vacancy in excess of one month, since the landlord is able to claim a refund of the property tax for a vacant periodin excess of one month.

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(2) Under the subsequent tenancy concession, the IRAS will allow a claim for a deduction for expenses incurred to securea subsequent tenant, even though such expenses are regarded as capital in nature, as they were incurred to acquire asource of income.

(3) Under the subsequent property concession, the IRAS will allow a claim for a deduction for expenses incurred forsecuring a first tenant if the property is a subsequent property.

(4) Under the block basis concession, the IRAS allows rental income from the same block of rental-income-producingproperties to be aggregated to determine the net rental income or loss.

4 Pebble Business Pte Ltd (PBPL)

(a) Singapore income tax implications of the design work

The Singapore tax implications arising from the fees receivable by PBPL will depend, to a large extent, on the Indian taximplications.

Under Singapore’s modified territorial basis of taxation, tax is levied on both Singapore-sourced income as well as foreign-sourced income. Singapore-sourced income is taxed once the income is accrued, regardless of when the income isreceived. On the other hand, foreign-sourced income will only be taxed when the income is received or deemed received inSingapore, unless the remitted income is exempt from tax under the Singapore Income Tax Act (SITA).

Corporate income tax

Where an income is derived from a foreign source, such income would normally have been taxed in that foreign jurisdiction.However, such income when remitted to Singapore could still be subject to tax again, thus giving rise to double taxation. Suchdouble taxation can be eliminated or relieved if the foreign income qualifies for relief either under the exemption method orthe foreign tax credit system.

Foreign-sourced income in the form of dividends, branch profits and services income received in Singapore will be exemptfrom Singapore income tax under the foreign-sourced income exemption (FSIE) scheme, provided the following conditions areall met:

– the year the foreign income is received in Singapore, the headline tax rate of the foreign country from which the incomeis remitted is at least 15%; and

– the foreign income has been subject to tax in the foreign country from which it was remitted; and– the Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.

Service income is considered foreign-sourced if the service is rendered in the course of a person’s trade, business orprofession, through a fixed place of operation in a foreign jurisdiction. On the contrary, the income from a service will beconsidered Singapore-sourced if it is not rendered through a fixed place of operation in a foreign jurisdiction and the personrendering the service carries on a trade, business or profession of providing such a service in Singapore. This isnotwithstanding that:

– the income is derived from services rendered outside Singapore; and– in accordance with the provisions of a double taxation agreement (DTA) with the foreign jurisdiction, tax is payable in

that foreign jurisdiction.

According to guidelines issued by the Inland Revenue Authority of Singapore (IRAS), a ‘fixed place of operation’ refers to aplace of management, an office, or a certain amount of floor space at the disposal of a person carrying on a trade, businessor profession of rendering services through which the person or their employees perform the activities which produce theprofits of their trade, business or profession in the rendering of services. Such a place must also have features of permanence,i.e. it is not of a temporary nature, but should be at the disposal of the person on an ongoing basis and be used regularly bythe person to carry on their trade, business or profession of rendering services.

It has also been clarified that the mere presence of a person in a particular location does not necessarily mean that thepremises or facility is at the disposal of that person. For example, the regular visits by a person to a major customer to renderaudit services at the premises of that major customer does not cause the major customer’s premises to constitute premisesat the person’s disposal for the purpose of their profession. Whether the premise or facility which is at the person’s disposalhas features of permanence is a question of fact.

Applicability to PBPL

The design fee received by PBPL from Pebble Business India Pty Ltd (PB India) will fall within the definition of service incomebecause it is income derived from professional, technical, consultancy or other services provided by PBPL in the course of itstrade, profession or business.

Foreign-sourced income exemption (FSIE)India is a country with a headline tax rate (defined as the highest corporate tax rate in that country) of at least 15%. Also,the fees (service income) will be subject to either 10·506% withholding tax on the gross income, or subject to corporate taxin India at 42·024% on the net income. In either case, both the first and the second conditions under the FSIE regime willbe satisfied. The third condition is not a concern as it is included to give the taxpayer an option to opt out of the exemptionif it is more beneficial to do so. So, the conditions can all be considered satisfied.

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However, to qualify for the FSIE scheme, PBPL will need to convince the IRAS that the fees it will receive from PB India arederived from a fixed place of business. Arguably, the fixed meeting room made available and at the disposal of the threeemployees each time they are in India on an ongoing basis, supported by a contractual agreement, could constitute a fixedplace of business from the perspective of the IRAS. Based on the advice from the Indian tax consultant, this test may, however,not be satisfied from the Indian tax perspective unless PBPL establishes a project office in India. If a project office is set up,or if the IRAS accepts that there is a fixed place of operation, then the income would qualify for full tax exemption and PBPLwill not be taxed on such income when it is received in Singapore. On the contrary, if such income does not qualify forexemption, PBPL could potentially be taxed again on the income remitted to Singapore. If this is the case, then it shouldconsider whether a successful application for special tax exemption might be made to the Minister for Finance or whether itcan seek relief from any double taxation under the foreign tax credit (FTC) system.

Special tax exemption (s.13(12))Where tax exemption cannot be granted under the FSIE scheme, the Minister for Finance can still, upon formal application,grant a special full or partial tax exemption if he thinks that the foreign income will be reinvested and contribute to economicactivity in Singapore. However, such an application is unlikely to receive a favourable consideration in this case, becauseagain the exemption is premised on the income being regarded as foreign sourced.

Foreign tax credit (FTC) systemUnder the FTC system, Singapore tax residents can claim relief for foreign tax paid on remitted income against the Singaporetax payable on the same income. The relief can come in two forms:

– unilateral tax relief (UTR) in respect of foreign income remitted from countries with which Singapore has not concludeda comprehensive DTA; and

– double taxation relief (DTR) in respect of foreign income remitted from countries with which Singapore has concluded acomprehensive DTA.

As Singapore has concluded a DTA with India, the relevant form of the relief in this case is DTR.

Under the DTR scheme, there would, generally, not be any additional Singapore tax to be paid, where the foreign tax sufferedin the foreign country is higher than the prevailing corporate tax rate in Singapore (currently 17%). This would be the casefor PBPL if it suffers corporate tax in India at the rate of 42·024%, on the basis that it has established a permanentestablishment (PE) in India.

On the other hand, if tax is only accounted for in India at the withholding tax rate of 10·506% on the gross income, whilstthe foreign income is subject to tax at 17% on the net income when it is remitted to Singapore, PBPL can only claim a creditfor the actual withholding tax suffered in India, and so, if this is less than the Singapore corporate tax, only the difference orincremental tax would be payable in Singapore.

There is also a risk of the IRAS regarding the income as being Singapore-sourced due to the absence of a PE in India. Thisis notwithstanding that the income is derived from services rendered outside Singapore and, in accordance with the provisionsof a DTA with the foreign jurisdiction, tax is payable in that foreign jurisdiction. If this is the case, then double taxation wouldensue.

Individual income tax

Based on the Singapore/India tax treaty, PBPL’s three employees who are sent to India will be exempt from Indian individualincome tax provided:

(1) their time spent in India does not exceed 183 days in any year;

(2) their remuneration is not borne by any PE which PBPL has in India or by any other Indian resident entity, i.e. PB India;and

(3) their services fall within the definition of FTS.

If this is the case and the exemption applies, then the employees will not pay any individual income tax in India but willcontinue to be subject to Singapore income tax, so PBPL’s tax equalisation policy will have no effect.

The Indian tax consultant has confirmed that the third condition is satisfied and it is highly likely that the first condition willalso be satisfied, as even a series of two to three week visits will be unlikely to result in the employees spending more thansix months in India in any one year. Thus whether or not the exemption applies will depend on whether PBPL is consideredto have a PE in India (as discussed above) or the employees’ remuneration is considered as being borne by PB India. Giventhat the proposed fee arrangement between PBPL and PB India specifically includes a charge for the employees’ time, PB India may well be considered to be bearing the cost of their remuneration.

In that case, the exemption will not apply and the income derived by the three employees sent to India will be subject toindividual income tax in India, but such foreign income derived by an individual is not then subject to Singapore tax when itis remitted to Singapore, i.e. no double taxation will arise. Also, PBPL’s tax equalisation policy will be implemented, tocompensate the employees for any additional individual income tax payable by them in India compared to the tax whichwould have been payable by them in Singapore, as any such additional tax will be borne by PBPL. This additional tax borneby the employer (PBPL) is also normally treated as additional income to the employee and so will further increase the amountof individual income tax payable in India. There will be no impact for Singapore individual income tax purposes but PBPLwill be able to deduct the additional tax borne by it as part of its salaries cost for corporate income tax.

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(b) Ways to mitigate the taxes payable

To qualify for exemption under the FSIE regime, PBPL would need to have a fixed place PE in India. Based on the discussionin part (a), this is only assured to be the case if PBPL establishes a project office in India. However, having a fixed place PEin India will expose this entity to Indian corporate tax at 42·024% on the net income attributable to this entity. Whether thiswould mitigate the overall amount of corporate tax payable will depend on whether the corporate tax payable on the netincome derived from both the current and future projects is likely to be lower than 10·506% of the income on a gross basis.If this is not the case, then it is better for PBPL or PB India to bear the additional tax burden arising from any withholdingtax which is not otherwise relievable under the FTC scheme.

If PBPL wants to avoid the additional personal income tax exposure which could arise under its tax equalisation policy, it willneed to ensure that the three employees are exempt from Indian individual income tax in terms of the Singapore/India doubletax treaty, i.e that they do not stay in India beyond 183 days in any year and their salaries are not considered as paid by orultimately borne by a PE or fixed base of PBPL in India or by PB India. Hence, again, PBPL should avoid opening a projectoffice in India and the terms of the fee arrangement between PBPL and PB India should be amended such that PBPL doesnot seek to recover the cost of these employees directly from PB India.

Alternatively, PBPL could opt to second the three employees to India in such a manner that during their secondment period,PB India is fully responsible for paying their salaries and the employees are fully accountable to PB India, and not PBPL.However, in these circumstances, the employees would not qualify for exemption from Indian individual income tax underthe Singapore/India double tax treaty.

To minimise the withholding tax exposure, the parties should avoid having PB India bear the withholding tax, since doing sowill result in a higher withholding tax exposure because of the requirement to re-gross. Given the intentions of the party, thisalternative may not be commercially viable, but should be considered in future similar transactions.

Tutorial note: Candidates only needed to identify and explain two ways of mitigating the income tax exposures.

5 Tannery Enterprise Pte Ltd (TEPL)

(a) Samuel’s advice

Samuel’s advice is based on BenCo being able to take advantage of the start-up tax exemption (SUTE) scheme, which isapplicable to newly incorporated companies.

The conditions for participation in the SUTE scheme are as follows:

– the company must be incorporated in Singapore;– the company must be a tax resident in Singapore for that year of assessment (YA); and– the company must have no more than 20 shareholders throughout the basis period for that YA where:

– all of the shareholders are individuals beneficially and directly holding the shares in their own names; or– at least one shareholder is an individual beneficially and directly holding at least 10% of the issued ordinary shares

of the company.

TEPL has been incorporated since 2010, so is no longer eligible for the SUTE scheme but BenCo as a Singapore privatelimited company, newly set up by Benjamin, will do so if the above qualifying conditions are satisfied.

Under the SUTE scheme, qualifying companies can claim a full tax exemption on the first $100,000 of normal chargeableincome and a further 50% exemption on the next $200,000 of normal chargeable income for each of its first threeconsecutive YAs. So if the management expenses paid by TEPL to BenCo are granted a tax deduction, then TEPL couldpotentially save $17,000 tax (i.e. 17% of $100,000) for each of YA 2016, YA 2017 and YA 2018. Therefore, for the threeyears if the SUTE scheme applies to BenCo, provided TEPL is granted such a tax deduction, the two companies collectivelywill benefit from a tax saving totalling $51,000.

However, to obtain a tax deduction for the annual management fees of $100,000 paid to BenCo, TEPL must be able tosubstantiate that the fees paid are:

– for bona fide services rendered to TEPL;– incurred wholly and exclusively in the production of TEPL’s income;– revenue in nature and not specifically prohibited under the Singapore Income Tax Act (SITA);– charged to TEPL based on some equitable methods and not excessive.

This last point may be particularly contentious given that the two companies may be considered related if Michael hassignificant control or influence over his son’s company.

Arguably, also, the $100,000 annual management fees may be considered excessive even in the event that Benjamin canjustify that he indeed provides management services which genuinely benefit TEPL. This in itself may be considered unlikelyunless BenCo employs personnel with the necessary expertise and skill sets to provide these services. In addition, even if anannual fee of $100,000 is acceptable for the years 2016 and 2017, it is certainly not justifiable for the first year of 2015when BenCo will have been in existence for barely a month.

There is a risk that the setting up of the new company could be viewed as an attempt to abuse the SUTE scheme which wasintroduced to support entrepreneurship and encourage the growth of local enterprises. This would certainly be the case if an

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investigation reveals that the new entity is just a shell company with no economic substance and does not conduct anybusiness activities nor provide any genuine management services. Samuel’s proposal could potentially, therefore, be treatedas tax evasion on the basis that TEPL is attempting to claim fictitious expenses, supported by falsified invoices. If this is thecase, there will be potential penalties, fines and/or jail term depending on the severity of the offence. Where a person wilfullyevades or assists any person to evade tax, the penalty is based on 300% of the tax undercharged and, in addition, there isa maximum fine of $10,000 and/or maximum jail term of three years. For serious fraudulent tax evasion cases, the penaltyis based on 400% of the tax undercharged and, in addition, there is a maximum fine of $50,000 and/or maximum jail termof five years.

(b) Ricky’s advice

Ricky’s comment that Samuel’s idea is tax avoidance may be an understatement, as it is more likely that it will be viewed asa case of tax evasion, particularly if it involves a claim for fictitious expenses.

Under Ricky’s proposal, if the qualifying conditions (as set out in (a) above) are satisfied, the two new Singapore companiesto be set up by Benjamin (B1Co and B2Co) may potentially both qualify for the SUTE scheme. Also, if the tax authorityaccepts that the two contracts are properly sourced in these two new separate companies, then TEPL could potentially savetax of $34,000 (i.e. 17% of $200,000) for each of YA 2017 and YA 2018. Resulting in a total collective tax saving of$68,000 over two years if the arrangement is not challenged.

Unfortunately, this is not likely to be the case as Ricky’s idea may not constitute proper tax planning and, in fact, may beconstrued as a tax avoidance scheme under s.33 of the SITA.

Section 33 provides that where the Comptroller is satisfied that the purpose or effect of any arrangement is directly or indirectlyto:

– alter the incidence of any tax which is payable by or which would otherwise have been payable by any person;– relieve any person from any liability to pay tax or to make a return; or– reduce or avoid any liability imposed or which would otherwise have been imposed on any person,

he may disregard or vary the arrangement and make such adjustments as he considers appropriate to counteract any taxadvantage obtained or obtainable, except in the case of an arrangement which is carried out for bona fide commercial reasonsand has not as one of its main purposes the avoidance or reduction of tax.

Attempting to shift the source of profits for the two contracts from TEPL to B1Co and B2Co in order to take advantage of theSUTE scheme by merely rubber-stamping the contracts could be challenged as a clear tax avoidance scheme since there isartificiality and transfer pricing issues as between two somewhat related parties. As such, it can clearly fall under any of thethree limbs of s.33(1). Only evidence of a strong commercial reason for the arrangement would constitute a good defenceagainst a charge of tax avoidance (s.33(3)(b)). Something which would appear to be lacking in this case.

Further, attempting to set up two identical new companies instead of just one new company in order to maximise the benefitsunder the SUTE scheme can also be considered as a deliberate attempt to yield tax benefits in terms of s.33(1). Again, thereis no evidence of a strong commercial reason for doing this, given that the two companies are identical and will be run bythe same individual, Benjamin.

Should the tax authority successfully invoke s.33, then the expected tax savings of $68,000 will likely be negated by theissuance of revised assessments. However, unlike tax evasion which is illegal and comes with hefty penalties, there arecurrently no tax penalties for tax avoidance schemes.

(c) Recommendations for Benjamin

Both his two uncles’ suggestions are unacceptable as they are likely to be construed as at least tax avoidance and potentiallyas tax evasion. Given the circumstances, it will be difficult to justify either proposal as a proper tax planning arrangement,which is supported in terms of strong commercial reasons.

Benjamin’s original idea of starting his business as a sole proprietorship and only converting it into a private limited companywhen it starts returning a decent profit is a sound one. He should stick to this original plan and not enter into anyarrangements which could result in trouble for the whole family, something which his father also wants to avoid.

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Professional Level – Options Module, Paper P6 (SGP)Advanced Taxation (Singapore) December 2015 Marking Scheme

Available Maximum1 Company A

(i) Company A – Deductibility of expensesExpenses deduction rules applicable to an investment holding company 4·0Computation of chargeable income for Company A 3·0Debt to be pushed down to operating entity (Company B) 1·5Directors to be employed by operating entity (Company B) 1·0Claiming of PIC benefits 1·0

–––––10·5 9·0–––––

(ii) Company A – Errors in tax compliance Calvin non-resident, with reason 1·5Requirement to withholding tax from director’s fee paid, including rate and due date 2·0Penalties for non-compliance 1·0Non-compliance on declaration of transport allowances 1·5Penalties for non-compliance for both the directors and Company A 3·0Time bar for raising assessments 2·0Recommendation for company to make a voluntary disclosure of errors 1·0Benefits of voluntary disclosure 2·0

–––––14·0 12·0–––––

(iii) Company B – Tax incentives Key features of pioneer incentive 2·5Key features of investment allowance 2·5Discussion of which is the better incentive 2·0

–––––7·0 5·0

–––––

(iv) Company C – GST obligationsRegistration rule/tests 3·0Conclusion that has to register based on the prospective test 1·0Contract is a zero rated supply 1·0Company should ask for exemption from GST registration 1·0Effects of exemption 1·0

–––––7·0 5·0

–––––

Appropriate format and presentation of the letter 1·0Structure including relevant headings 1·0Effectiveness of communication 1·0Logical flow 1·0

–––––4·0

–––––35·0–––––

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Available Maximum2 Maxim Elite Pte Ltd

(a) GST treatment of financial servicesServices should be treated as a zero rated and not an exempt supply, with reasons 2·0Significance of the error 2·0

–––––4·0

(b) GST treatment of transferGST is a transaction tax, so applies to the sale of capital asset 1·0Need to account for deemed output tax 1·0Significance of error 1·0

–––––3·0

(c) Acquisition of shares v acquisition of assetsGST implicationsTransfer of shares is an exempt supply 1·0Transfer of assets is subject to GST unless it is a transfer of a going concern (TOGC) 1·0Conditions for TOGC 3·0MEPL will be neutral as regards the treatment, with reasons 1·5Stamp duty implicationsStamp duty on transfer of shares 1·0Stamp duty on sale of real property assets 2·0Income tax implicationsImplications for the seller 2·0Implications for the buyer 2·0Merger and acquisition allowance 1·0Conditions 2·5Stamp duty waiver 1·0Position re CFSPL’s losses 2·0

–––––20·0 18·0––––– –––––

25·0–––––

3 Cheryl Wee and Louis Styles

(a) Purchase of residential propertiesComputation of basic buyer’s stamp duty 1·0Computation of additional buyer’s stamp duty for joint purchase 2·0Conclusion that stamp duty is the same as if Louis was the sole purchaser 1·0

–––––4·0

(b) Sale of residential and commercial propertiesSeller’s stamp duty on the sale of the residential property 2·0No seller’s stamp duty on the sale of the commercial property 1·0

–––––3·0

(c) Ways to minimise stamp duty in (a) and (b)One mark for each valid method identified 3·0

(d) Taxation of rental incomeDefinition of Singapore source 1·5Basis of taxation 2·0Computation, including deductible and non-deductible expenses 3·5Concessions available 5·0

–––––12·0 10·0––––– –––––

20·0–––––

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Available Maximum4 Pebble Business Pte Ltd (PBPL)

(a) Income tax implications of the contractSingapore tax implications depend on Indian tax implications 0·5Basis of taxation 1·5Corporate tax implicationsWays to relieve double taxation of foreign income 1·5Conditions for FSIE scheme 1·5Special test for service income 1·5Definition of a fixed place of operation 1·5Application to PBPLDesign fees are service income 1·0Logical conclusion re availability of the FSIE 2·0Section 13(12) exemption 1·0Forms of FTC and identification of DTR as applicable 1·5Logical conclusion re application of FTC 2·0Individual income tax implicationsApplication of the treaty provisons 1·0Employees’ personal liability 1·5Effect of equalisation policy 1·5

–––––19·5 17·0 –––––

(b) Ways to mitigate income taxesAny TWO methods for 1·5 marks each, maximum 3·0

–––––20·0–––––

5 Tannery Enterprise Pte Ltd (TEPL)

(a) Samuel’s adviceConditions of the start-up tax exemption (SUTE) scheme 2·0TEPL no longer qualifies for the scheme but BenCo can 1·0Benefits available and computation of potential tax savings 1·5Conditions for claiming a deduction for management fees 2·0Application to TEPL 2·0Risk that may be treated as a tax evasion case 1·5Potential penalties 1·5

–––––11·5 10·0–––––

(b) Ricky’s adviceRicky’s comments on Samuel’s advice is incorrect 1·0Both companies will potentially qualify for the SUTE scheme 0·5Computation of potential tax savings 0·5Potential tax avoidance and provisions of s.33 3·0Application to TEPL re shifting of profits 1·5Application to B1Co and B2Co re use of two rather than one company 1·5Effect of adjustments, but no penalties 2·0

–––––10·0 8·0–––––

(c) Recommendations to BenjaminReject both of his two uncles’ suggestions 1·0Keep to his own original plan, which is sound 1·0

–––––2·0

–––––20·0–––––

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